Analysts see little impact on US banks from mark-to-market rule

Fri Apr 3, 2009 12:22pm BST

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April 3 (Reuters) - Analysts see accounting rulemakers' move to allow more flexibility in valuing toxic assets as a small positive for U.S. banks, even as markets around the world greeted the news with much optimism.

"The market's reaction to the Financial Accounting Standards Board (FASB) mark-to-market vote is completely overblown, and the benefits from these changes will have very little impact on financial institutions' accounting practices," analyst Paul Miller at Friedman, Billings, Ramsey wrote in a note to clients.

The five-member FASB on Thursday voted unanimously to let banks exercise more judgment in using mark-to-market accounting that has forced billions of dollars in writedowns and been blamed for worsening the recession.

But the board split 3-2 on backing guidance that would let lenders take smaller losses on impaired assets such as mortgage-backed securities, a move critics said would let banks hide reality from investors. [nN02355900]

Morgan Stanley analysts view the new FASB rules as a small positive for large-cap banks as this may reduce the volatility of future earnings and the potential declines in regulatory capital.

They expect State Street Corp (STT.N) and Bank of New York Mellon Corp (BK.N) to be the biggest gainers from the new FASB rules partly due to the composition of their securities book and legacy mark-to-market exposure.

Citigroup Inc (C.N), JPMorgan Chase & Co (JPM.N) and Northern Trust Corp (NTRS.O) are also well positioned to benefit from the new rules, Morgan Stanley analysts said.

However, analysts at both Morgan Stanley and Friedman said banks were unlikely to categorize their assets as "level 3," which denote securities whose values are based entirely on management estimates, from "level 2," where estimates are created based on market prices and inputs.

"Even if companies did move a substantial amount of assets to level 3, we believe that the market would discount any material write-up in asset values," Friedman's Miller said.

In addition, Miller noted that the fundamentals of these banks had not changed as credit deterioration will continue regardless of any mark-to-market accounting rules.

(Reporting by Tenzin Pema in Bangalore; Editing by Himani Sarkar)

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